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Welcome to the New Videogame Gold Rush

Companies like Razer are moving into the space currently dominated by home consoles, with devices that can play high-end gaming experiences. Photo: Ariel Zambelich/Wired

For the last decade, three companies have ruled the gaming console business with an iron fist. But that's all about to end.

In 2013, there will be over a dozen different companies competing for mindshare and money in the videogame hardware market. Small startups like Ouya, GameStick and Wikipad will join established players with deep pockets like Nvidia, Valve and Razer in an attempt to eat Sony, Microsoft and Nintendo's lunch.

Not to mention cloud gaming services like Agawi, Nvidia's Grid and Sony's Gaikai. Even the zombie corpse of OnLive is still shambling around somewhere. And who knows what Apple might try.

"There isn't a company in the U.S. at the moment that isn't hoping to get into videogames. You hear it the whole time: 'We're in the meat-packing business, but my son's hoping to start a videogames division." That was Tron director Steven Lisberger in October 1982, as quoted in the book Generation Xbox. Sound like today?

2013 is starting to feel like other gold-rush eras of videogame history, like the Atari age Lisberger was mocking. Or like the CD-ROM scramble of the early 1990s, when every consumer electronics company on Earth tried to jimmy their way into the console market.

So, why now?

The rise of mobile, Facebook and free-to-play games has caused an enormous disruption in the gaming space that companies like Ouya, Razer and Nvidia are attempting to exploit, says Jesse Divnich, vice president of insights and analysis at Electronic Entertainment Design and Research.

"Because these markets have fragmented so much outside of traditional console games, we're starting to see a lot of companies ... try to enter into what is considered right now to be a very disrupted market," Divnich said.

Capitalism abhors a vacuum: There are plenty of free-to-play and inexpensive options on mobile devices and PC, but not in the living room, so it's natural that new companies would spring up to attempt to fill that hole.

But it's more than that. The meteoric rise in popularity of smartphones and tablets has driven down the cost of their components, making low-cost gaming consoles an attainable goal for smaller companies. Microsoft and Sony were able to sell Xbox and PlayStation far below their costs, something that a startup could never do. Thanks to economies of scale, it's possible today to make a good-enough game machine at a profit.

Components like the 5.6-inch LCD screen in the upcoming Rift virtual reality visor from the startup Oculus are much cheaper to acquire thanks to the manufacturing infrastructure built for smartphones and tablets, the company's CEO told Wired.

You can't count out David just because Goliath is big, especially when there are a dozen Davids.And it was the need for a standardized smartphone platform that led to the development of Android, which is used by almost all of these new devices. This, too, has helped to drastically lower the cost of making a new game machine. It's a perfect storm.

"Hardware is getting soft," says Julie Uhrman, founder of Ouya: The components needed to build a game machine are getting smaller, cheaper and more fungible.

"The consoles had been the same for 7 years," Uhrman said. "They continue to be closed systems that are expensive for gamers. We started seeing gamers and developers moving toward mobile because it was more open, more accessible, and less expensive."

At $99, it's not possible for Ouya to offer a console that's anywhere close to the power of the Xbox 360 – let alone the new game platforms that Microsoft and Sony are likely to release in the coming months. But neither can Microsoft and Sony offer a sub-$100 console.

But not everyone has faith that these newcomers can succeed.

"Entering the hardware business is really tough," said Phil Harrison, a Sony veteran now with Microsoft's gaming division, at a recent event in London, as reported by Edge. "It's about having a supply chain and a distribution model and a manufacturing capacity and all the things that go with it. It's a non-trivial problem to solve and it takes thousands of people to make reality."

"That's the same thing IBM would have told Microsoft 30 years ago," said David Politis, chief marketing officer at Xi3, in response to Harrison's comments.

Xi3 said at the Consumer Electronics Show that Valve Software, which runs the highly successful PC digital game store Steam, had invested in the upstart computer maker. At CES it showed off a PC called "Piston" with a small form factor, meant to run Steam and replace a traditional game console in your living room. Valve has announced that it, too, intends to release such a low-cost, quiet living-room machine in 2013 to provide consumers with an alternative to Xbox.

You can't count out David just because Goliath is big, especially when there are a dozen Davids.

EEDAR analyst Divnich says that these small companies might just be angling for a buyout, not really intending to build their way into the market from scratch.

"Certainly we're seeing a shift in the paradigm, but I don't believe this is an immediate threat to Microsoft or Sony," he said. If a company like Ouya does turn out to strike a nerve with consumers and see some initial success, it would be trivial for an established player with deep pockets to just duplicate that model and use their influence to crowd Ouya out of the market, Divnich said.

Other initiatives that were once seen as a threat to the Big Three's dominance have vanished, he said.

"If we look back a year or more ago, a lot of people thought OnLive and Gaikai were going to be a huge threat to the status quo, but what we found is that a lot of those [cloud gaming] companies failed. And the one that succeeded, Gaikai, is now owned by Sony."

Divnich said that one or two of the new entrants into the market will find some measure of success. "It's going to be a very interesting 2013," he said. "The one thing that's certain is that they all can't succeed. The majority of them are not going to succeed."

True enough. In the CD-ROM gold rush of two decades ago, most of the new consoles crashed and burned. The thing is, the one that didn't was called PlayStation.